The Goods and Services Tax (‘GST’) Regime was introduced in India in 2017 to create a comprehensive and robust framework for levying indirect taxes on supply of goods and services or both in India. Under the GST Regime, all the erstwhile forms of indirect taxes like Excise Duty, Service Tax, Value Added Tax (‘VAT’) and Sales Tax were merged into one GST.
The main objective behind introducing the GST was to facilitate seamless tax flow at every stage of supply chain while eliminating the impact of double taxation. In a business transaction between a Supplier and a Recipient of goods or services, a Supplier may procure additional supply of goods and services on behalf of the Recipient in order to avoid delay on the condition of subsequent reimbursement.
This reimbursement of expenses to the Supplier often forms a subject matter of dispute wherein the issue that arises is whether or not such reimbursement is taxable under GST. Through this White Paper, we seek to analyse the implication of GST on Reimbursement of expenses.
MEANING OF THE TERM ‘REIMBURSEMENT’
Generally, reimbursement connotes a repayment of money made to a person. The term ‘reimbursement’ has not been defined under the Central Goods and Services Tax Act, 2017 (‘CGST Act’). However, reference can be made to the Black’s Law Dictionary which defines the term ‘reimbursement’ as “To pay back, to make restoration, to repay that expended; to indemnify, or make whole.”
In catena of decisions, the Courts have interpreted the term ‘reimbursement’. In M/s Bovis Lend Lease (India) P Ltd. v. Income Tax Officer, Bangalore [2009 SCC OnLine ITAT 504], the Income Tax Appellate Tribunal, Bangalore observed that a payment will be regarded as ‘reimbursement’ if it constitutes the following:
- Firstly, there should be three parties in the transaction, an original payer, a payee and a person reimbursing the amount to the original payer;
- Secondly, there should be a clear and ascertainable relationship between the original payer and the person reimbursing. Therefore, reimbursement made by a person not connected to the original payer would not constitute reimbursement;
- Thirdly, the liability arising for reimbursement under such transaction can be clearly determined and paid by the original payer on the behalf of the person reimbursing;
- Fourthly, the liability that has arisen should be of the person reimbursing the money to the original payer; and
- Lastly, the liability should have crystallised.
In another case of Tata Iron and Steel Co. Ltd. v. Union of India [2000 SCC OnLine SC 1678], the Supreme Court held that the term ‘reimbursement’ means and implies the restoration or paying back or refunding an equivalent amount that has been paid or expended earlier.
REIMBURSEMENT OF EXPENSES
In the course of business, several expenditures are incurred by a business either on its own account or through its Suppliers. When such Supplier incurs an expenditure on the behalf of the Recipient (business), in order to save time and delay, and claims an equivalent amount for the expenditure incurred it is recognised as pure reimbursement. In this case, the Supplier re-routes the expenditure to the Recipient of goods or service by obtaining repayment from the Recipient.
Herein, the expenditure incurred by the Supplier for the Recipient of goods or service can take the following two forms:
- Incidental Expenses incurred as a Supplier- Incidental expenses incurred by the Supplier are those expenses that are incurred before the time of delivery or supply of goods and services respectively which form a part of the value of supply.For example, commission, travelling expenses, packing charges, etc. constitute incidental expenses.
- Expenses incurred as a Pure Agent- Expenses incurred by the Pure Agent are those expenses that though incurred before the delivery or supply of goods and services respectively on the behalf of the Recipient of goods or service, are not included in the value of supply. For example, registration fees, stamp duty, transportation charges paid to another Supplier constitute expenses incurred as a Pure Agent provided that such Supplier has been authorised through a contract by the Recipient of goods or service to receive supply on the Recipient’s behalf.
Since incidental expenses incurred by the Supplier are included in the value of supply, it forms a taxable event under Section 15 of the CGST Act while the expenses incurred as a Pure Agent form an exception to the general rule and are excluded from the value of supply, hence, not taxable as provided by Rule 33 of the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’).
TAXABILITY OF SUPPLY UNDER THE GST REGIME
Before delving into the taxability of reimbursement of expenses under the GST Regime, it is imperative to understand the basic principles which govern taxation under GST and prior to the GST Regime.
Prior to the introduction of GST in India, the indirect taxes were bifurcated and levied at various stages namely; manufacturing of goods and providing of services, purchase or sale of goods and provision of services under the following legislations:
- Where any new goods were manufactured within the territory of India, then it was made subject to the Excise Duty under the Central Excise Act, 1944 which was levied by the Central Government.
- The Sale and Purchase of goods within India was subject to the Sales tax levied by the Central Government under the Central Sales Tax Act, 1956 and the State Government under their respective laws.
- Further, provision of services was made subject to Service Tax under the Finance Act, 1994 levied by the Central Government.
- Lastly, Sale of goods within the states in India was considered a taxable activity under VAT laws of the respective States, which was collected by the State Governments.
However, with the introduction of the GST Regime in India, all the forms and types of indirect taxes discussed in the above paragraphs were merged into a single and a consolidated ‘Goods and Services Tax’ which is collected at only one taxable event i.e. “Supply” and the prcoceeds from such tax is to be shared equally between the Central and State Governments.
The CGST Act defines the term ‘Supply’ under Section 7(1) as including:
“(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(b) import of services for a consideration whether or not in the course or furtherance of business;
(c) the activities specified in Schedule I, made or agreed to be made without a consideration; and
(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.”
In other words, a Supply under the CGST Act comprises of the following parameters:
- Firstly, the supply is made in respect to provision of goods or services or both.
- Secondly, the supply of goods or services is made in exchange for a consideration.
- Thirdly, such supply is made in the course of business.
- Lastly, the supply of goods or services constitutes a taxable event under the CGST Act.
Herein, the terms ‘goods’ and ‘services’ referred to under Section 7 of the CGST Act are defined under Section 2(52) and Section 2(102) of the CGST Act respectively.
Section 2(52) of the CGST Act defines the term ‘goods’ as all types of movable property including actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply excluding movable property in the form of money and securities.
On the other hand, the term ‘services’ has been defined under Section 2(102) of the CGST Act as including activities that are in relation to either the use of money or conversion of such money from one currency or denomination to another form of currency or denomination through the cash mode or any other mode for which a separate consideration is charged. However, it is pertinent to note that goods, money and securities are expressly excluded from the ambit of supply.
As provided under Section 7(1) of the CGST Act, GST is levied only upon supply of goods and services or both. Therefore, according to this provision a reimbursement of expenses received for receiving supply on behalf of a Recipient will become a taxable event only if it falls under the ambit of supply.
Reimbursement is a matter of fact and therefore can be made taxable under the GST Law only if it is proved that such repayment is received in exchange of goods and services.
On the other hand, a pure reimbursement which is a mere repayment of the amount paid by the Recipient of goods or services to the Supplier would not fall under the ambit of the scope of supply and hence not taxable under the GST Laws.
THE PURE AGENT CONCEPT UNDER GST
In a business transaction involving a supply of goods or services or both from a Supplier to a Recipient, sometimes an additional supply may be received by the Supplier to supplement the original supply made to the Recipient of goods or services. In this kind of transaction the concept of Pure Agent holds significance when the issue relates to the taxability of such a transaction.
A Pure Agent refers to a person registered under the Section 22 of CGST Act who while supplying goods to a Recipient in the capacity of a ‘Supplier’, incurs additional expenditure on behalf of the Recipient and receives an additional supply from other Suppliers in this regard (which is routed back to the Recipient) during the duration of the original supply.
The result of such a transaction is that the Supplier acting as a Pure Agent of the Recipient of goods or service obtains a repayment or reimbursement of the amount equivalent to the expenditure incurred from the Recipient of goods or service.
Therefore, in the context of the additional supply, the Supplier acts as a Pure Agent of the Recipient of goods or service, receiving supply and incurring expenditure on his behalf. The additional expenditures that can be incurred by the Supplier include port charges, port fees, freight, transport charges, etc.
Conflicts often rise at this point while levying GST on the reimbursement of expenses. The disputes generally are with respect to determination of whether the goods or services received were received as Pure Agent or not while calculating the transaction value of a supply of goods and services.
The Indirect Taxation laws both prior to and post introduction of the GST Regime have recognised Pure Agent Supply as forming a different class of supply which are not to be made taxable.
The main objective why Pure Agent Supply has not been made taxable under the law is to prevent the Supplier or the Pure Agent from bearing the burden of taxes which has originally been procured on behalf of the Recipient of Goods and Services on his authorization.
TREATMENT OF PURE AGENT PRIOR TO THE GST REGIME
Prior to the introduction of GST Regime in India, the concept of Pure Agent was recognised under the Service Tax Determination of Value Rules, 2006 (‘Rules’).
According to Rule 5 of the Rules, a Pure Agent was a person who:
- Entered into a contract with Recipient of service authorizing him to act as a Pure Agent while providing a taxable service;
- Such person does not intend to keep the title of goods or services procured as a Pure Agent or use such goods or services procured;
- Such person receives the amount equivalent to what was incurred by him while procuring such goods or services.
The Rules further provided that such expenditure would not form a part of taxable service if the following conditions were satisfied:
- The Recipient of goods or services had authorized the Service Provider to act as a Pure Agent in his behalf;
- The Service Provider through his actions acted as a Pure Agent while making payment to the third party from whom the goods or services were procured;
- The liability of making payments for the expenditure incurred by the Service Provider was actually of the Recipient of the goods or service who was also the end user of such goods or services;
- The Recipient of the goods or services had complete knowledge that the goods or services in such a Pure Agent transaction would be provided by a third party;
- The payment made by the Service Provider in the first instance was separately indicated in the invoice issued to the Recipient;
- The Service Provider recovered from the Recipient only the amount incurred;
- The goods or services procured by the Service Provider in capacity of a Pure Agent for the Recipient were in addition to the original goods or services provided on his own account.
TREATMENT OF PURE AGENT POST GST REGIME
After the introduction of the GST Regime in India, the concept of Pure Agent has been retained in essence from the Rules with slight modifications.
Under the CGST Act, Section 15 incorporates the provision for value of taxable supply. According to this provision, the value of supply on which the GST will be levied will be determined through the transaction value.
Herein, transaction value refers to the price actually paid or payable for supply of goods or services that forms the sole consideration of supply between unrelated Supplier and Recipient. Sub-section (2) to Section 15 of the CGST Act further provides that the value of supply includes the following:
” a) taxes, duties, fees and charges levied under the Central Goods and Services Tax Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Actor the Goods and Services Tax (Compensation to States) Act.
b) any amount incurred by the Recipient for which the Supplier is liable to pay with respect to the supply.
c) incidental expenses, including commission and packing, charged by the Supplier to the recipient of a supply and any amount charged for anything done by the Supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;
d) interest, late fee or penalty for delayed payment of any consideration for any supply; and
e) subsidies excluding those provided by the Central Government and State Governments”
However, the provisions of this Section are not applicable when the Supply is made by a Pure Agent.
Further the concept of Pure Agent as an exception to provision for value of supply provided under Section 15 of the CGST Act has been recognised under Rule 33 of the CGST Rules. The explanation to Rule 33 of the CGST Rules titled as “Value of supply of services in case of pure agent” incorporates the definition of the term ‘Pure Agent’ which is similar to the earlier definition under the Rules.
Rule 33 of the CGST Rules defines a Pure Agent as a person who satisfies the following conditions:
- The person enters into a contract with the Recipient of supply wherein the Recipient authorizes such person to act as his Pure Agent and thereby incur expenditures or costs on his behalf in the course of the supply of goods or services or both;
- Such person neither holds nor has any intention to hold title of goods and services procured in the Pure Agent Supply in future;
- Such person does not utilise the goods or services procured on behalf of the Recipient in his own interest;
- Such person receives an equivalent of the expenditure incurred by him in order to procure such good or services which is in addition to the payment he receives for his original supply.
The definition under Rule 33 of the CGST Rules differs from the one provided under the Rules with respect to number of essentials prescribed by the law.
Rule 33 of the CGST Rules further provides the circumstances or conditions wherein supply received in the capacity of a Pure Agent will be excluded from the value of supply of the Supplier and therefore will not be subject to GST as under:
- The Pure Agent supply will be excluded from the value of supply only if the Supplier acts as a Pure Agent of the Recipient of goods or services (on the authorisation of the Recipient) at the time of making payment to the third party;
- The Pure Agent clearly indicates the payment made in relation to the Pure Agent supply apart from the original supply in the invoice issued to the Recipient;
- The Supply of goods or services procured by the Pure Agent from other Suppliers is complementing the original supply made by such Pure Agent in his own account to the Recipient.
The conditions prescribed for Pure Agent and Pure Agent supply under Rule 33 of the CGST Rules assume great significance while deciding upon the value of supply for levy of GST.
Reimbursement of Expenses falls under the purview of Rule 33 of the CGST Rules when such repayment is a repayment received by the Supplier from the Recipient of goods or services under the contract of Pure Agent. For example, in case of a Legal Counsel providing services to its client, stamp duty paid by the Counsel on behalf of the client would be reimbursed to the counsel and would not be subject to GST.
Most of the disputes that arise under the GST Laws with respect to the reimbursement of expenses relates to whether or not a supply constitutes a Pure Agent Supply under the CGST Rules.
While Rule 33 of the CGST Rules provides the general principles for Pure Agent transactions, it is a matter of fact that is dependent on the facts and circumstances of the case. The Courts have on several occasions through precedents dealt with the issue i.e. Whether a Supply amounts to Pure Agent Supply.
One of the most landmark cases with respect to Pure Agent Supply is Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd. [2018 SCC OnLine SC 196], wherein the Respondents in the course of providing consulting engineering services to the Petitioners for highway project incurred expenses in the nature of air travel, hotel stay, advertisement bills, etc. obtained imbursement from the Recipient Petitioner.
The main issue in this case was whether such reimbursement of expenses should be included while computing the value of taxable supply. Answering in affirmative, the Supreme Court held that reimbursement of expenses or out of pocket expenses do not form a part of the ‘gross amount charged’ and hence the value of supply as for purpose of levying indirect taxes, valuation of service cannot be more than the consideration paid for seeking such service. Therefore, the Supreme Court held that reimbursement expenses or out of pocket expenses were not taxable.
That in the case of B.S. Refrigeration Ltd. v. Commissioner of Service Tax, Bangalore [2006 (111) ECC 707], the Customs, Excise and Gold Tribunal held that the expenditures incurred by Clearing and Forwarding Agents, reimbursable by the Recipient of the Service was not taxable under the Service Tax regime.
In Rolex Logistics Pvt ltd. v. CST, Bangalore [2009 (20) STT 431], it was held that the gross amount for service indicated only the amount on account of the services rendered. Since the reimbursement of expenses payment is not in the nature of the services rendered by the Supplier in his own account, it was not to be included in the gross amount of service.
Reiterating this stance, the Supreme Court in the case of CCE & C, Rajkot v. Reliance Industries Ltd. [2009 SCC OnLine CESTAT 3067],held that reimbursement of expenses did not form a part of value of taxable service.
Post the introduction of the GST Regime in India, the Authority of Advance Ruling in several cases has tried to determine various activities under the Pure Agent Rules. For instance, in In re: Arivu Educational Consultants (P.) Ltd. [2019 (10) TMI 757], the Authority for Advance Ruling (‘AAR’) held that collecting of exam fee as a Pure Agent from students in addition to providing coaching, learning and training services and remitting such exam fee collected to the university without adding any margin of profit would be excluded from the value of supply and hence not taxable under the GST regime.
In the case of In Re: Premier Vigilance & Security Pvt. Ltd. [2018 SCC OnLine WB AAR-GST 22], the AAR held that toll charges paid by the Applicant to a bank in addition to transporting cash to such bank did not fall under the scope of Rule 33 of the CGST Rules and therefore such toll charges were taxable under the CGST Act.
The Concept of Reimbursement of expenses forms an important subject matter under the GST Law as it has direct implications while computing the value of taxable supply. Reimbursement of Expenses is referred in consonance with the Pure Agent Concept provided under Rule 33 of the CGST Rules.
Though the term reimbursement has not been specifically used under the CGST Act but it has been given effect through the CGST Rules. However, while making any expenditure as a Pure Agent, a Supplier should ensure that he fulfils the essentials of Rule 33 of the CGST Rules which includes making a contractual agreement with the Recipient of goods or services which specifically authorise the Supplier to incur expenditures on the Recipient’s behalf.
– Team AMLEGALS, assisted by Ms. Kriti Goswami (Intern)
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